Burton Malkiel Says Buy and Hold is Alive and Well, and it Works

Burton G. Malkiel, the Princeton professor who brought Efficient Market Theory to the mass market in his classic A Random Walk Down Wall Street has taken up the defense of buy and hold investing, and the idea of diversification more broadly.

None of it’s convinced Malkiel. In a strongly worded defense on the Wall Street Journal’s opinion page, adapted from his introduction to the upcoming 10th edition of Random Walk, he remains as convinced as ever that the average investor should own a diversified portfolio made up of cost-effective index funds and contribute to it regularly and rebalance periodically to take advantage of the benefits of dollar cost averaging. (In short: if you’re buying regularly, you’ll buy when prices are low and when they’re high, bringing your average cost somewhere in the middle.It’s an important discipline for retail investors who many studies show too often buy at the high.)

The timeless investment maxims of the past remain valid. Indeed, their benefits may be even greater today than ever before.

To hush the naysayers, Malkiel provides a chart of the 10 year performance of $100,000 split between 5 Vanguard funds as follows (the links take you to Yahoo comparisons of each fund to the US stock fund, VTSMX):

That shows a growth of almost $92,000 over the period. Malkiel writes:

The diversified portfolio, annually rebalanced, produced a satisfactory return even during one of the worst decades investors have ever experienced. And if the investor also used dollar-cost averaging to add small amounts to the portfolio consistently over time, the results would have been even better.

In the comments on the piece, one criticism raised was that Malkiel had cherry picked his time frame, “mov(ing) the goal post” to “show you a great return.” That the last 10 years would have been negative.

Obviously his tilt toward emerging markets helped, but the most crucial was the bond stake, a standard form of diversification found in even the simplest portfolios.

(Editor’s note on Correction: the original version of this piece said Malkiel’s portfolio held 4 Vanguard funds, which is incorrect. It holds five. Also the Wall Street Journal chart tracks 10 years of performance, not 15, as described in the original version of this post. The corrected sentence: To hush the naysayers, Malkiel provides a chart of the 10-year performance of $100,000 split between 5 Vanguard funds as follows.)

Absolutely right Jon. Thanks for the heads up — I’ve corrected that in text, and noted it in a correction. The charts and other were all accurate and no other changes were required.
Appreciate your close read!

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